
Class, H^ Q^^ 
Book- '^^^ - 
Copyrigtit Vi" 



COFffilGHT DEPOSIT. 



A Century of Prices 



An Examination of Economic and Financial Conditions as 

Reflected in Prices, Money Rates, etc., During the 

Past 1 00 Years, With a View to E tablishing 

General Principles Which Mav Aid in 

Interpreting the Present and Future. 

By Ex Senator THEODORE E. BURTON, 

Chairman Board of Directors Merchants National Bank 
of New YorJc, Author of "Crises and Depressions," etc.; 

And Ci. G. SELDEN, 

Managing Editor of "The Magazine of Wall Street," 
Author of '"The Machinery of Wall Street," etc. 



The MAGAZINE OF WALL STREET 

42 BROADWAY 
NEW YORK 



i.: 



lU'.. 



Copyright, 1919 
By The Magazine of Wall Street 



St? 



\^^^ 



INTEODUCTORY NOTE 

'T^ HE chapters and graphs comprised in 
-■■ this book first appeared in The Maga- 
zine of Wall Street and were widely 
commented upon not only for their unnsual 
originality but for the practical bearing of 
the principles developed upon the actual 
work of the business man or investor. 

History tells what happened, but these 
graphs, with the keen analyses which ac- 
company them, show why it happened, and 
explain the great controlling principles of 
business and finance in the straightforward 
fashion of one business man talking to an- 
other. 

The authors require no introduction to 
the American reading public. Ex-Senator 



A CENTUEY OF PRICES 

Burton is one of the world's leading author- 
ities on prices and their relation to econ- 
omic and financial conditions, and G. C. 
Selden is internationally known for his keen 
and thorough analyses of the effects of 
economic factors on business and invest- 
ments. 

The Magazine of Wall Steeet 
August, 1919 



CONTENTS 

Chaptee I. 

PRICES AS AN INDEX OF ECONOMIC 

AND INVESTMENT CONDITIONS 

Why the study of statistics is called 
''dry" — The value of the graphic method 
of presentation — Interpretation of econ- 
omic and financial conditions in the light 
of the past — Importance of prices — Mean- 
ing of the money rate — Why the commercial 
paper rate is used — The averaging of 
prices — Relation hetween hond yields and 
bond prices — The stock average — What is 
meant by a ''weighted" average of com- 
modity prices — The method of interpreta- 
tion — The permanency of general princi- 
ples — Inter-relations among the different 



A CENTUHY OF PRICES 

factors — The influence of wars — The gen- 
eral purpose of these chapters. 

Chaptee II. 
GREAT ECONOMIC FORCES SINCE 1790 

American conditions alone inadequate 
for a broad view — Why English prices are 
chosen — ^English commodity prices since 
1782— Prices as a relationship — The '* psy- 
chology" of prices — Pronounced effects of 
wars on commodity prices — Effect of 
cheaper production — The supply of money 
— Gold production — ^World's stocks of gold 
— ^Increased use of credit — Minor changes 
in commodity prices now less violent than 
formerly — ^The supply of capital — Prices 
and yields of British consols — The two 
main elements in their price level— Growth 
in the supply of capital — The **flow" of 
capital — Effect of the accumulation of 
liquid capital — ^How more money and 

6 



A CENTURY OF PRICES 

credit raise commodity prices — Why bond 
yields rise and fall with commodity prices 
— Real income versus money income — 
Post war price movements — Practical con- 
clusions. 

Chapter m. 

WHAT AMERICAN COMMODITY PRICES 
SHOW 

Causes of war prices — Effect of currency 
inflation in the Civil War — Comparison be- 
tween the World War and the Civil War — 
Elements in Civil War currency prices — 
Difference between depreciated and ex- 
panded currency — Differing relations with 
European price level — Commodity prices 
and our export trade — International ad- 
justment of price levels — How our export 
balance depends upon relative price levels 
— Effect of large exports in stimulating 
general trade — Pronounced influence of 



A CENTURY OF PRICES 

gold imports — The ** major cycle" — ^Inter- 
balances — Wheat and cotton. 

Chaptee IV. 

CAUSES OF CHANGES IN INTEREST 
YIELDS AND MONEY RATES 

Relation between demand and supply of 
capital — Capital is the product of labor — 
Factors in the supply of capital — Rapidity 
of circulation of capital— Capital classified 
according to rapidity of circulation — ^Im- 
portance of distinguishing between fixed 
and circulating capital — Rise and fall of 
bond yields — Why higher commodity 
prices increase the demand for capital — 
Diversion of capital into fixed forms — 
The disposition to save — Money rates — 
Connection with bond yields — Causes of 
high rates — How over-extended bank loans 
arise — Scarcity of credit down to 1874 — 



8 



A CENTURY OF PRICES 

High rates of panic years — Is ** tight 
money" a thing of the past? 

Chapter V. 

PRINCIPLES OF STOCK PRICES 
By G. C. Selden 

Relations with factors previously dis- 
cussed — Rising commodities benefit indus- 
trials — ^How stockholders sometimes profit 
at the expense of bondholders — Panics af- 
fect all securities — The ** minor cycle" — 
Various explanations offered for recurrent 
declines — The fundamental cause — Action 
and reaction — Strong and weak buyers — 
Speculation in trade channels — Mutual in- 
fluence of stocks and business conditions — 
Features of the minor cycle — Stocks and 
the money rate — Bull markets are based 
on surplus funds — How stocks forecast 
business conditions. 



9 



Chapter I. 

PRICES AS AN INDEX OF ECONOMIC 
AND INVESTMENT CONDITIONS 

np HE study of statistics is commonly 
■"■ accounted * * dry." Yet it is dry only be- 
cause dryly presented or imperfectly under- 
stood. When statistics over a period of 
years are made quickly intelligible to the 
eye by graphic charts and diagrams, and 
when the great vital and controlling in- 
fluences which cause the rise and fall of 
these pictured lines are understood and 
visualized, the subject becomes more fascin- 
ating to the business man than the most 
** gripping" novel of adventure. In these 
chapters our effort is to present the sub- 
ject in this intelligible and practical way, 



11 



A CENTURY OF PRICES 

as business men talking to business men, 
and an elaborate series of graphs has been 
prepared for the purpose. 

The great practical importance of inter- 
preting present and future economic and 
financial conditions in the light of the past 
can hardly be over-estimated. In this field 
it is most emphatically true that coming 
events cast their shadows before. The 
prime difficulty in the past has been the lack 
of adequate records, over a sufficiently long 
period, of prices and other economic and in- 
dustrial statistics. That difficulty, however, 
is being gradually overcome. The com- 
pleteness and accuracy of current statistics 
are improving year by year as their im- 
portance comes to be more generally recog- 
nized; while the painstaking researches of 
students have shed much additional light 
on the price levels of the past and their 
causes. The graphs which accompany 



12 



A CENTURY OF PRICES 

these chapters not only bring together in 
a convenient form the laborious researches 
of others, but they contain additional mat- 
ter, which is the result of the patient delv- 
ing of the statisticians who have assisted 
us in this work. 

Comparative statistics of this character 
afford a means of determining the trend of 
events. Rightly interpreted, they give a 
warning of coming changes which is of the 
highest significance.* 



* In this coimection it may not be amiss to mention 
Senator Burton's confident prediction, in an address 
before the American Investment Bankers' Association 
at Denver, in September, 1915, that a period of higher 
money rates and scarcity of capital was approaching 
— a prediction that was naturally unwelcome, but 
proved strikingly correct; or Mr. Selden's forecast, in 
an article published in November, 1916, that the then 
rising trend of bond prices would culminate early In 
1917 and that a considerable decline would follow — 
also opposed to the views of many bond men at that 
time, but remarkably fulfilled in the outcome. These 
instances are mentioned to show that studies of this 
character, by some dubbed "theoretical," are not with- 
out a very direct and definite value. 



13 



A CENTURY OF PRICES 

IMPORTANCE OF PRICES 

In viewing economic and investment con- 
ditions broadly over considerable periods, 
prices (including the interest rate — the 
price of capital) are perhaps more impor- 
tant, and certainly more all-inclusive, than 
any other class of statistics. 

Money rates, for example, are the result 
of a country-wide and, under normal con- 
ditions, a world-wide demand and supply 
of capital. Nearly every enterprise is a 
borrower. Every bank, and many other in- 
stitutions and individuals, are lenders. 
Every investor controls some fraction of 
the available supply of capital. Even the 
small accumulations of savings bank de- 
positors indirectly reach and affect the 
money market. A general fall in the profits 
of business men is immediately reflected in 
their necessity for increasing their loans, 
while a rise in their profits soon brings an 



14 



A CENTURY OF PRICES 

increase in bank deposits and thus larger 
offerings of liquid capital and easier money 
rates. 

In short, the movements of money rates, 
when properly understood, afford a sort of 
combined index to the whole industrial and 
investment situation, and similar principles 
apply to the other factors here discussed. 

It is important to distinguish between 
the short term money rate, the longer term 
rate and the price of investment capital as 
shown by the average income yield on high- 
grade bonds. The rate for call money, 
which is dependent on the immediate sup- 
ply from day to day, is not broadly indica- 
tive of fundamental money market condi- 
tions; and to some extent the same is true 
of time money. The money rate used in 
the graph covering that field which ac- 
companies a succeeding chapter, is the rate 
for prime commercial paper, usually of 



15 



A CENTURY OF PRICES 

about six months' maturity. This term is 
long enough to afford considerable stability 
to the rate, and this form of credit is also 
most closely connected with industrial con- 
ditions. Moreover, it is possible to compile 
this rate more accurately and from an 
earlier date than in the case of call or time 
money. 

AVERAGE PRICES 
In dealing with bonds, stocks, and com- 
modities the only way to get a general view 
is to average the prices of a large number. 
The price of any one bond, stock, or com- 
modity is likely to be influenced by special 
causes peculiar to itself. But by averaging 
a score of the principal bonds or stocks, or 
a hundred commodities, these minor or ex- 
ceptional variations are for the most part 
eliminated, so that the movements of the 
resulting averages reflect general condi- 
tions. 



16 



A CENTURY OF PRICES 

In the case of bonds, the computation of 
such an average is embarrassed by the fact 
that every bond has a date of maturity, 
when it will be redeemed at par value. 
Therefore a bond selling at a discount 
gradually rises to par, while a bond at a 
premium gradually falls to par, regardless 
of the demand and supply of capital. So 
it is necessary to average, not the price of 
bonds, but their yields to maturity as ob- 
tained from the bond tables (or from the 
tables arranged in graph form, which are 
more convenient for most purposes). 

This average of bond yields is, in a broad 
way, the reciprocal of bond prices ; that is, 
its general movements are exactly opposite 
to those of bond prices, since the higher the 
price the lower the yield. 

A graph showing this average of bond 
yields over a long period is really illumi- 
nating, when taken in connection with 



17 



A CENTUEY OF PRICES 

similar graphs showing other important 
economic factors for corresponding times. 

Since stocks have no date of maturity, a 
simple average of the prices of 20 to 50 
different issues serves to compare the gen- 
eral level of the market from year to year 
or month to month. 

A similar method is followed in compar- 
ing the relative planes of commodity prices 
at different times. One widely used aver- 
age represents the total of the wholesale 
prices of 96 different important commodi- 
ties on the first day of each month — ^the 
average of the twelve months being taken as 
the average for the year. 

Another method is to ^^ weight" the prices 
of the various commodities as nearly as 
may be in proportion to the different quan- 
tities of them that enter into consumption. 
While there is no startling difference be- 
tween the general movements of a weighted 

18 



A CENTURY OF PRICES 

and an unweighted average, the preference 
should be given to the weighted average as 
more scientifically compiled, and that form 
is used in our graph of American commod- 
ity prices since 1850. 

METHOD OF INTERPRETATION 

In general, the method of interpreting 
price movements must be historical. It is 
clear that the same causes would produce 
the same effects upon prices in the future 
as in the past. Exactly the same conditions 
will never be repeated, but the effect of 
each cause taken separately will neverthe- 
less be the same. 

Moreover, there is a striking similarity 
in the sets of conditions which are repeated 
at different times. The man whom in our 
childhood we were taught to call the wisest 
that ever lived, said that there is nothing 
new under the sun, and as regards princi- 
ples his statement can still hardly be ques- 

19 



A CENTURY OF PRICES 

tioned. The aeroplane is new, but its princ- 
iples date back to the later carboniferous 
period, when enormous bats and reptiles 
swarmed the air. The wireless is new, but 
only because we have just discovered the 
principle on which it is based. And the 
student of economic history, as he watches 
the interplay of forces which made the 
prices of the past, is much more surprised 
at the correspondences he discovers than 
at the differences. 

Highly interesting, too, are the inter- 
relations among the various graphs pre- 
sented. We ^all find that, within limits, 
each sheds light on all the others. And this 
fact is most important in enabling the ob- 
server to weave the whole into a well-in- 
formed and balanced view of the broad 
economic and financial situation. 

The historical value of these statistics, 
also, should not be entirely ignored. To the 



20 



A CENTUEY OF PRICES 

reader who is of an observant and interpret- 
ing turn of mind, they give a better com- 
prehension of the actual business condi- 
tions of the past than could be obtained by 
many hours of wading through the prosaic 
recitation of isolated facts and events. 
When we see, for example, the extraordi- 
nary and what would today be called pro- 
hibitive rates which the business man often 
had to pay for money in the '40s, '50s and 
'60s, we get a new and clearer comprehen- 
sion of the industrial conditions of those 
times. 

Among the influences which cause great 
and lasting changes we shall find that wars 
have an outstanding importance. This is 
because nothing else subverts conditions so 
widely or so radically. We have only to 
compare the Germany of today with the 
Germany of 1914 to see how far these 
changes may go ; and although America has 



21 



A CENTURY OF PRICES 

not undergone any such vital or funda- 
mental disorganization, yet she has experi- 
enced a transformation far greater than any 
other in her history except the Civil War. 
It is highly important to the banker, busi- 
ness man and investor to appreciate the 
character of that transformation and its 
bearing upon our future. 

It is perhaps unnecessary to add that 
these chapters deal with broad tendencies 
and general principles. A minute exami- 
nation of minor fluctuations and of the iso- 
lated historical events which caused them 
would be of little service to the business 
man, however interesting it might be to 
the student of history. We shall endeavor 
to dwell for the most part upon those fac- 
tors which can be of practical help in the 
interpretation of the present and the 
future. 



22 



CHAPTER II. 
GREAT ECONOMIC FORCES SINCE 1790 



I 



T is desirable first to view the op- 
eration of economic and financial 
forces in as broad a perspective as possible. 
In that way a better grasp of principles is 
obtained. 

For this broad view the records of Amer- 
ican conditions alone are inadequate. The 
United States before the Civil War was a 
new, detached, undeveloped nation. Its 
banking system was crude. Its supply of 
capital was trifling compared with its 
natural resources. Because of its great 
area, the imperfect means of communica- 
tion and transportation then existing were 
entirely insufficient to weld it into an eco- 



23 



A CENTURY OF PRICES 

nomic whole. And the business records of 
that time are fragmentary and incomplete. 

England was the nation that, in the first 
half of the last century, had reached the 
highest industrial and financial develop- 
ment; and owing to her position as the 
world market for capital, a position which 
remained entirely secure until interfered 
with by the great war, her economic records 
are more representative of world business 
than any others available. 

The two graphs showing the ** Level of 
English Commodity Prices" since 1782 and 
the prices and yields of '* British Consols" 
since 1790, reflect in condensed form Eng- 
lish money market, investment and business 
conditions for a century and a quarter. 
COMMODITY PRICES 

Taking up first the level of commodity 
prices, the primary fact must be recalled 
that a price represents not an absolute or 



24 



A CENTUEY OF PRICES 

independent figure but a relationship — ^the 
relation of the value of the article priced 
to the value of gold or of whatever may be 
the standard money of the time. 

Prices must therefore be viewed from two 
angles: The value of money on one side, 
and the value of goods or commodities on 
the other side. The idea of the money- 
value of goods is familiar ; but its less fami- 
liar reciprocal, the goods-value of money, 
is equally significant. 

Commodity prices, therefore may rise 
because commodities become worth more 
or because money becomes worth less ; and 
they may fall because goods can be pro- 
duced or manufactured more cheaply, or 
because money is growing scarcer in com- 
parison with the work it has to do, and is 
therefore becoming more valuable because 
it is in relatively small supply. 

Both these factors are in constant opera - 



25 



A CENTURY OF PRICES 

tion, sometimes the one being more impor- 
tant and sometimes the other. So the move- 
ments of the general level of commodity- 
prices, like those of a sailboat crossing a 
river, are always the resultant of two forces 
acting at the same time. 

Another influence of some importance as 
affecting the temporay and minor move- 
ments of commodity prices is what might 
be called **the psychology of prices." Buy- 
ers are more anxious to buy when other buy- 
ers are also anxious, and the same is true of 
sellers. So when a buying or selling move- 
ment is once well started it often carries 
prices beyond their natural level. Also, 
certain prices are so firmly established by 
custom that they are very slow to respond 
to actual changes in conditions. But these 
factors are of minor importance in consid- 
ering the broad price movements of a cen- 
tury. 



26 



A CENTURY OF PRICES 

With these principles in mind, what are 
the economic and financial changes reflected 
by the movements of English commodity 
prices — ^which, it is to be remembered, 
broadly represent the prices of the whole 
commercial world? 

The first point to strike the eye is the 
very great effect on prices of the Napoleonic 
Wars, 1793-1815, and the World War, 
1914-1918. The highest price level of 1809 
was more than 80 per cent, above that of 
1789, the year of the French Revolution, 
and the English price level at the end of 
1918 was approximately 125 per cent, above 
that of July, 1914. In each case (and also 
in our own Civil War, as will be seen later) 
high prices were due to a scarcity of prod- 
ucts resulting from the great diversion of 
labor power into actual fighting forces and 
into war work and from the exceptional 
demands and wastes of war, together with 



27 



A CENTUEY OF PRICES 

a big inflation of currency and credit. 

No such tremendous advances in prices 
would be possible without more money, or 
more credit, or more of both. It takes twice 
as much money or credit to handle a thous- 
and bushels of wheat at $2 a bushel, as at 
$1 a bushel, and the same with other com- 
modities. If a greater supply of money or 
credit were not provided, the rise of prices 
resulting from scarcity of goods would sooii 
cause ** tight money," a condition which 
would seriously hamper and disturb the all- 
important war production. 

In the late war both England and Amer- 
ica endeavored to check the upward flight of 
prices by a policy of price-fixing. The re- 
sults were not wholly satisfactory — ^notably 
in the cases of coal and wheat — but on the 
whole the experiment may perhaps be called 
a success as compared with what might have 
happened without such a policy. The only 



28 



A CENTURY OF PRICES 

policy which could entirely prevent rising 
prices in time of war would be a govern- 
ment control so complete as to amount to 
the theoretical socialistic state. 

It will be noted that smaller wars, as the 
Crimean War and the American Civil War 
(comparatively small so far as the effects 
on the world at large were concerned), had 
a similar though less important effect on 
prices, and that a small price-boom fol- 
lowed the Franco-Prussian War. 

In every case a decline from high war 
prices soon followed, but the extent and 
severity of the decline depended on numer- 
ous other conditions then entering the situ- 
ation. 

EFFECT OF CHEAPER PRODUCTION 

The next point to be noted is that down 
to 1896 the broad tendency of prices had 
been downward for 87 years, although this 
tendency had been interrupted by numer- 



29 



A CENTURY OF PRICES 

ous sharp rallies and by advances which, 
although of great significance at the time, 
eventually proved to have been temporary. 
If we take 1820 and 1900 as average years, 
not much affected by wars and represent- 
ing neither the highest nor the lowest prices 
of those times, we note a decline from about 
180 to 100, or about 45 per cent, of the high- 
er figure. 

The principal cause of this decline was 
the cheapening of production through im- 
provements in machinery and in transpor- 
tation. The machine-made shoe is cheaper 
than the hand-made shoe because less hu- 
man labor is necessary to make it. Wheat 
raised by the aid of the tractor, the harves- 
ter and the threshing machine, and moved 
to market over the railroad, is cheaper than 
wheat sown and reaped by hand or by hand 
tools and hauled by horses over rough or 
muddy roads. And this transformation has 



30 



A CENTUEY OF PRICES 

extended throughout all industry. 

But why, it will be asked, in view of this 
continuously cheaper production, did prices 
rise from 1850 to 1873, nearly a quarter of 
a century, and from 1896 to 1914, when 
large-scale production was reaching its 
highest development? It is true that both 
1850 and 1896 were periods of relative trade 
depression; but that fact alone does not 
answer the question. A more comprehen- 
sive reason must be sought. 

The answer lies at the other end of the 
price-relationship — the supply of money. 
For although the supply of goods may be 
increasing, if the supply of money increases 
still faster, prices must soon rise. 

In 1850 the worlds production of gold 
was approximately $40,000,000 annually. 
Through discoveries in California and in 
Australia, it rose to about $150,000,000 in 
1853, fell to $91,000,000 in 1874, and did not 



31 



A CENTURY OF PRICES 

again rise above the high point of the '50s 
until about 1893, when discoveries in the 
Klondyke and improved methods of mining 
resulted in another great increase, until 
$466,000,000 was reached in 1912. Since 
that date production has been compara- 
tively stationary. 

A better view, however, is obtained by 
considering the world's stock of gold on 
hand, since but little gold is consumed, in 
the ordinary sense of that word. This 
stock is estimated to have been about $2,- 
200,000,000 in 1850; to have risen with rea- 
sonable regularity to about $6,000,000,000 
in 1896, and thereafter at a more rapid rate 
to perhaps $11,000,000,000 in 1916. 

In addition to this increase in the supply 
of gold, there has been a constant increase 
in the amount of credit based upon each dol- 
lar of gold, and credit serves the same pur- 
pose as money in the transaction of busi- 



32 



A CENTURY OF PRICES 

ness. In the United States, more than 95 
per cent, of all payments are made by bank 
checks, which are a form of credit. 

We conclude, therefore, that from 1850 
to 1873 the increase in the supply of money 
and credit was, broadly speaking, more 
rapid than the increase in the supply of 
commodities through cheaper methods of 
production, so that prices rose (aided 
somewhat by three wars) ; that from 1873 
to 1896 the increased production of com- 
modities got the upper hand, causing a gen- 
eral decline in prices; while after 1896 a 
further great increase in gold production 
and in the use of instruments of credit 
turned the scale and brought higher com- 
modity prices. 

The reasons for many of the minor 
changes in the level of prices are shown 
upon the graph. It is noticeable that these 
minor changes have become less violent 



83 



A CENTURY OF PRICES 

with the passage of time, a highly desirable 
development. If some plan could be in- 
vented to keep the general level of com- 
modity prices stationary it would be an al- 
most inestimable boon, but apparently such 
a plan would have to be world-wide in its 
application. Several ingenious methods 
have been suggested, but they seem to re- 
quire a much higher plane of world-organi- 
zation than has yet been attained. 
THE SUPPLY OF CAPITAL 
The best index to the relative supply of 
capital over such a long period as is here 
considered, is to be found in the yield on 
the British consolidated debt. Consols have 
no date of maturity and have a longer con- 
tinuous record than any other security. 
Both prices and yields (the latter inverted) 
are shown on the graph for completeness, 
as the rate of interest has twice been re- 
duced. 



34 



A CENTURY OF PRICES 

There are, of course, two main elements 
in these prices — the credit of the British 
nation, and the relation between the de- 
mand and supply of capital for investment. 
From 1816 to 1914 British credit stood so 
high that changes in the yield on consols 
were due almost entirely to variations in 
the demand and supply of capital ; but the 
Napoleonic Warsi and the World War of 
1914 caused such a vast increase in the 
British debt that national credit was some- 
what affected, and consols fell for that rea- 
son as well as because of the rapid dissipa- 
tion of capital in war. But there can be no 
question that the main cause of changes in 
the price of consols lies in the relative sup- 
ply of capital in comparison with demand. 

We have already noted that the broad 
downward trend in commodity prices until 
1896 was due chiefly to the increase in the 
productive capacity of labor through im- 



35 



A CENTUEY OP PRICES 

provements in machinery and in transporta- 
tion. The same influence caused an increase 
in the supply of capital compared with the 
demand for it which was reflected in rising 
prices for consols from 1798 until 1896. In 
fact, after 1825, by which date British credit 
was thoroughly re-established, the accumu- 
lation of capital in excess of current needs 
was the principal cause of the rise in con- 
sols. 

This, among other considerations, led to 
a pretty general belief, in the late '90s, that 
the interest rate on capital would continue 
to fall, or at any rate would not rise materi- 
ally. The reasoning seemed clear : Improved 
methods of applying labor caused greater 
production of wealth, which in turn re- 
sulted in greater proportional accumulation 
of capital. This had caused rising bond 
prices and falling income yields for nearly 
a century. The presumption was exceed- 



36 



A CENTURY OF PEICES 

ingly strong that the same causes would 
continue to operate and to produce a simi- 
lar effect. 

The same causes did continue to operate ; 
but as we have seen in discussing commod- 
ity prices, another very powerful influence 
counteracted and overbalanced them from 
about 1896 onward — the fact that the sup- 
ply of money and credit was increasing even 
more rapidly than the supply of goods, and 
thus forcing commodity prices upward. 
THE FLOW OF CAPITAL 

At first thought it would seem that easier 
money and credit should cause higher 
prices for consols and other similar secui'i- 
ties. Temporarily, they do have that ef- 
fect, because of the accumulation of de- 
posits — or liquid capital — ^in the banks. 
This liquid capital immediately tends to 
flow into securities and therefore raises 
their prices. But this is a temporary effect 
only. Liquid capital very soon flow* 
37 



A CENTURY OF PRICES 

through securities, and by means of gov- 
ernment, municipal, or corporate expendi- 
tures, into concrete and tangible things. In 
fact, the securities are issued only for the 
purpose of securing capital for expenditure 
upon these concrete and tangible things. 

The capital which flows into consols, for 
example, is not held idle by the British Gov- 
ernment. It is soon spent, for one purpose 
or another, and the spending means the 
employment of labor, the purchase of ma- 
terials and supplies — in short, the prompt 
turning of liquid capital into tangible prop- 
erty. Let us suppose that consols are sold 
in order to erect a big government building. 
Then the capital which is absorbed into the 
consols is immediately converted into mar- 
ble, bricks, structural steel, food, clothing 
and supplies for workmen, etc. And this is 
true of the capital which is invested in any 
and all securities. 



38 



A CENTURY OF PRICES 

Thus the offset of increased gold produc- 
tion and enlargement of credit facilities, 
although first felt in the money and credit 
markets, immediately passes through them 
and finds its more permanent manifestation 
in rising commodity prices. 

Bond yields must rise {and bond prices 
fall) with any prolonged advance in com- 
modity prices. The bond investor, through 
long habit, thinks of his interest return in 
terms of money ; but when he starts to make 
use of that interest return, what it will buy 
for him depends upon the level of commod- 
ity prices. If commodity prices rise while 
his interest return remains stationary, he 
soon finds that his real income has shrunk. 
His money income must rise with advanc- 
ing commodity prices, for exactly the same 
reason that the wages of labor must rise. 

It is equally true that rising commodity 
prices reduce the supply of investment capi- 



39 



A CENTURY OF PRICES 

tal and thus raise its price — that is, the rate 
of interest return on securities. We have 
just seen that capital, as it accumulates, 
flows quickly through securities and into 
commodities; so when the prices of those 
connnodities rise, they necessarily absorb 
more capital. In the example just men- 
tioned above, if the prices of building ma- 
terials and labor double, it will take twice as 
much capital to construct the government 

building. 

The connection between bond yields, or 
the price of investment capital, and the 
level of commodity prices is therefore very 
much closer than has been generally ap- 
preciated. And this is even more evident 
from the record of history, as shown in 
these graphs, than it from a priori reason- 
ing. 

In comparing the two graphs, we see at 
once that the graph of consols is, in a broad 



40 



A CENTURY OF PRICES 

way, the reverse of the graph of commod- 
ity prices. Even in the irregularities of the 
Napoleonic Wars, which are only partly 
comparable with modem conditions, low 
consols and high commodities roughly co- 
incided, and from about 1805 to 1896 the 
reverse correspondence is very plain. But 
the clearest demonstration of the principle 
is seen from 1896 to date, when a sudden 
turn in commodity prices was followed 
within two years by an equally sharp 
change in consols, with an almost perfect 
reverse correspondence in the two price- 
lines down to the present time. 

POST-WAR PRICE MOVEMENTS 
It will be seen from these graphs that 
every war which had a direct and important 
effect upon business conditions in England 
was preceded or accompanied by a rise in 
commodity prices and a fall in consols, and 
that after every such war (except the Boer 



41 



'^A CENTURY OF PRICES" 

War) commodity prices fell and consols 
rose. Even following the Boer War the 
long upward movement of commodity prices 
then in progres was checked for half at 
dozen years, and the yield on consols for 
some years showed a reactionary tendency, 
though without any highly significant 
change. 

Later graphs will show us that the same 
tendencies were strongly evident in the 
United States during and after the Civil 
War. 

We are fairly safe, then, in concluding 
that this is a law of post-war price move- 
ments, which may be modified, but rarely, 
if ever, nullified, by other influences, and 
that there is now a very strong probability 
of a gradually declining tendency in Eng- 
lish commodity prices and a rising tendency 
in consols and similar securities for some 
years to come. 



42 






£A3 



90 '35 1800 05 '10 '15 'ZO "25 '30 '35 '40 "45 '50 '55 'GO '65 "70 '75 '80 "85 "90 "95 1900 '05 '10 'IS 'II 




English Comhoditv Prices — This continuous index of English commodity prices since 17iSi is (.with the exception of the la^t 
two years) from Todd's Mechanism of Exchange. It is based on Je\on's index down to 180(1, SauerlKcU's 1860-70, the British Board of 
Trade index 1871-1''16, and. the Economist number for 1917 and 1918. the first, third and fourth having been recalculated to fit the third. 
These substitutions do not seriously alfect the value of the line as a continuous record. 



fy-^^k- '(ifr\iAfi^^: 



1790 1795 1800 1805 1810 1815 1820 I8Z5 1830 1835 1840 1845 1850 1855 I860 1865 1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 I9Z0 




■w- 



Brittsu Coxsols afford the lonee-" contimious securitv record obtainable. They have no dale of maturity. The interest rate 
Jfr down to 18S8. 2.^^^ from 1«» to IW.;. .'■ ,:; from I<)il4 to dale. Since the cbanne in the rate affected the price, we show 
the Weld througliout the period, tlie *>•"•'''' heini; rever.<ed to make the line comparable with the prices. 



CHAPTER in. 

WHAT AMERICAN COMMODITY PRICES 
SHOW 

\ S would naturally be expected, the 
'^~^ broad principles affecting the move- 
ments of American commodity prices have 
been the same as those brought out in con- 
nection with English prices in the last 
chapter. 

In America as in Europe, great wars have 
caused rapid advances in prices ; after those 
wars prices have fallen, though not so rap- 
idly as they had previously risen. From 
1865 to 1897 the prolonged decline was in 
large part due to the effect of machinery 
and improved transportation in cheapening 
production; increased gold production 



47 



A CENTURY OF PRICES 

played an important part in the rise of 
prices preceding the Civil War and follow- 
ing 1897; the influence of speculation in 
**boom" periods is plainly visible; and the 
expansion of currency and credit has had 
its due effect. 

On the other hand, there are marked dif- 
ferences in the degree to which these sev- 
eral factors have entered the situation at 
different times. 

It is impracticable to compile any trust- 
worthy average of American commodity 
prices previous to 1850. Falkner^s Index, 
it is true, runs back to 1840, but owing to 
the numerous interpolations and changes 
necessary in the earlier years it has obvious 
defects. Since 1850 commodity prices as 
shown in the accompanying graph afford a 
reasonably accurate view of the broad trend 
of prices. During and following the Civil 
War prices in currency are shown by the 



48 



A CENTURY OF PRICES 

dotted line, while the continuous line shows 
prices in gold, then selling at a considerable 
premium in currency. 

CAUSES OF WAR PRICES 
In this way we get a fairly accurate 
measure of the effect of currency inflation 
in the Civil War, hut it is impossible to 
make any similar comparison during the 
World War, from 1914 to 1918. Up to 
1917, when the United States entered the 
war, the increase in our currency was 
nearly all in gold— '* gold inflation,'' it has 
been called — ^because our big sales of war 
supplies to Europe brought a flood of the 
yellow metal to our shores. In 1917 and 
1918 the currency increase was in the form 
of Federal reserve notes, the result of re- 
discounting of Grovernment and commercial 
paper at the Federal banks, rendered pos- 
sible through the great change which had 
been made in our banking system. 

49 



A CENTUEY OF PRICES 

There was, therefore, an increase in the 
volume of our currency and credit which, 
in its practical effects, amounted to infla- 
tion ; but there was no premium on gold by 
which to measure the degree of inflation as 
in the Civil "War. And of course another 
important difference lies in the fact that 
the present currency inflation, in one form 
or another, is almost world-wide, while in 
the Civil War it was confined to the United 
States. 

We see at once, however, that the high 
Civil War prices were by no means entirely 
due to the depreciation of the currency. 
From 1863 to 1866 our prices in gold rose 
about 47 per cent., although English prices 
were nearly stationary in those years. This 
advance compares with a rise of about 87 
per cent in American prices from 1914 to 
1918 — and as we have just seen, the latter 
advance was accompanied by a great in- 



50 



A CENTUKY OF PRICES 

crease in outstanding currency, while dur- 
ing the Civil War gold was hoarded to such 
an extent that only about $25,000,000 is esti- 
mated by the director of the United States 
Mint to have been in circulation after 1861. 

Comparing English and American (gold) 
prices from 1849, the year of the California 
gold discoveries, to 1873, which was the 
highest point of English prices between 
1840 and 1915, we find that the rise in each 
country was almost exactly 83 per cent. 
But from 1864 to 1872 American (gold) 
prices were relatively higher than those of 
England— from 1865 to 1867, much higher. 
This fact must be attributed almost entirely 
to scarcity of goods resulting from diver- 
sion of labor and materials into the war and 
from special war demands and war wastes. 

The great rise in Civil War prices as ex- 
pressed in currency — ^the dotted line on the 
graph — ^was due partly to the increase in 



51 



A CENTURY OF PRICES 

the volume of currency and partly to actual 
distrust of the Government's ability to re- 
deem its notes. Even though the Civil War 
greenbacks had been immediately redeem- 
able in gold, there must have been, if the 
same quantity of them had been issued, a 
great rise in prices; but in addition to this 
inevitable rise, a further advance occurred 
because the relatively insecure financial po- 
sition of the United States Government at 
that time lowered the value of its notes. 

During the World War this element of 
doubt as to the United States Govern- 
ment's credit did not exist. Therefore the 
advance of American prices from 1914 to 
1918 was due almost entirely to the war 
demand, which was permitted to express 
itself in prices through currency and credit 
expansion and the increase in our stocks 
of gold. 

The war prices of 1918 reached substan- 



52 



A CENTURY OF PRICES 

tially the same level as the currency prices 
of 1865 ; but it would be entirely unsafe to 
assume that prices will fall from that high 
level as rapidly as they did in 1866 and 
following years. 

Two very important differences must be 
borne in mind: (1) The currency prices 
of 1865 were made in a depreciated money 
— depreciated as compared with gold. That 
was not true in 1918. Our currency was 
then greatly expanded, by imports of gold 
and by the issue of Federal reserve notes ; 
our outstanding bank credits were tre- 
mendously enlarged; but the element of 
depreciation as compared with gold did not 
enter the situation at all. 

(2) In 1865 our price level, as expressed 
in our currency, was enormously above the 
price levels of the rest of the world. Even 
our gold prices, as we have seen, were rela- 
tively higher than those of England. But 



53 



A CENTURY OF PRICES 

our 1918 prices were relatively lower than 
those of Europe. English prices of 1918 
were approximately 130 per cent above 
those of 1914, while our 1918 prices were 
about 88 per cent higher than 1914. 

After the Civil War our prices returned 
to their pre-war level but, for the reasons 
above outlined, that is not likely to happen 
after the present war. The world has 
learned to make its supply of gold safely 
support a larger amount of currency and 
credit and the change will be to some extent 
permanent. Therefore a higher level of 
commodity prices is likely to be maintained, 
though not the extreme level created by the 
pinch of war. 

COMMODITY PRICES AND OUR EXPORT 
TRADE 

In comparing the graph of American 

commodity prices with that of English 

prices shown in Chapter II, we see that 

there is a fairly close correspondence be- 

54 



A CENTUEY OF PRICES 

tween the two, and that it tends to become 
closer with the passage of time. 

This is not only because the same prin- 
ciples necessarily apply to both, but also 
because quicker and cheaper communication 
between America and Europe leads, over 
a long period of years, to a readier ex- 
change of goods. 

Whenever our price level rises above 
that of other nations we become a relatively 
good market in which to sell goods and a 
poor market in which to buy, so that our 
imports increase and our exports decrease, 
and when our price level falls to a rela- 
tively low plane this condition is reversed. 
But increased exports soon bring imports 
of gold to pay for them, and the addition 
of this gold to our supply of currency tends 
to raise our price level. In the same way 
increased imports cause us to send gold 
abroad to pay for the goods received, thus 



55 



A CENTURY OF PEICES 

reducing tlie gold base of our currency and 
credit and tending to reduce our price level 
to the point where foreigners cannot get 
so great a profit by shipping us their goods, 
and therefore our imports fall off. 

In this way our exports and imports of 
merchandise constantly tend to adjust our 
price level to the level which prevails in 
other countries. Prices throughout the 
commercial world are a question of inter- 
national adjustment through exchange of 
goods and gold. 

There is, however, a constant margin 
between what might be called the export 
level and the import level. Foreigners will 
not sell us goods until our prices are enough 
higher than theirs to cover the cost of 
placing the goods in our hands, and we mil 
not sell them goods unless our domestic 
prices are enough lower than theirs so that 
we can afford to stand the cost of shipping 



56 



A CENTURY OF PRICES 

the goods to them. Between these two price 
levels there must always be a margin, de- 
pending on the cost of transportation, tar- 
iffs, and the rates of foreign exchange. 

The question of the relation between 
American and foreign price-levels and its 
effect upon our exports, and through them 
upon our domestic business also, is one of 
much interest. Our ^ ' export balance" from 
year to year reflects very clearly not only 
this price-relationship but also the progress 
of the ^^ major trade cycle," as it is called — 
the broad swing of business activity from 
prosperity to depression and back again, 
covering a period of something like twenty 
years, which has been such a noticeable 
feature of our trade since 1837. 

The small graph herewith, showing the 
per cent of our export balance yearly to our 
total foreign trade, in comparison with the 
ratio of English to American commodity 



57 



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sijij-::;:":"":: 








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A CENTURY OF PRICES 

prices, makes these relationships quickly 
intelligible to the eye.* 

As would naturally be expected, the 
largest exports have usually occurred at 
times when English prices were relatively 
high compared with ours. The correspond- 
ence would be still closer but for the fact 
that during the most of this period our ex- 
ports consisted almost entirely of agricul- 
tural products and were therefore depend- 
ent upon crop conditions as well as upon 
prices. 



♦The export balance is shown in this form rather 
than in dollars in order to eliminate the change due 
to the rapid growth of our. trade, thus affording a line 
which is fairly comparable one year with another 
throughout the entire period. No scale is shown for 
the line giving the ratio of English to American prices, 
■ince it expresses merely a relationship and the fig- 
ures themselves have no significance. This line is 
obtained by dividing the English index numbers by 
the American index numbers. The fact that English 
prices were lower, compared with those of America, 
from 1902 to 1914, than they were from 1882 to 18»4, 
was chiefly due to the great reduction in transporta- 
tion costs between the two countries. 



59 



A CENTURY OF PRICES 

Those who are familiar with the business 
history of the United States will imme- 
diately note, on looking over this graph, 
that the high points of our export trade 
were in each instance followed by great 
prosperity, while small exports have, 
broadly speaking, accompanied periods of 
relatively poor general business. The prin- 
cipal reason why a large balance of exports 
over imports has such an emphatically 
stimulating effect upon our trade as a whole 
is because it results in an inflow of gold 
from foreign countries. Our chief use for 
gold is in bank reserves, where it permits 
an expansion of credit formerly equal to 
about five times the amount of the gold and, 
under our new Federal bank law, to a good 
deal more than that ratio. Easy credit is 
the life of trade ; hence the pronounced ef- 
fect of gold imports. 

Down to 1877 we regularly imported 



60 



A CENTURY OF PRICES 

more merchandise than we exported and 
sent gold abroad to pay for it — being a gold- 
producing nation. But between 1872 and 
1878 a great change occurred. Our im- 
ports of merchandise gradually fell from 
$656,000,000 to $432,000,000, while at the 
same time our exports increased from $469,- 
000,000 to $737,000,000. The result is shown 
in the sharp rise of the ** export balance" 
line on the graph. Large gold imports fol- 
lowed. From 1870 to 1875 our average ex- 
cess of gold exports was about $36,500,000 ; 
but from 1879 to 1881 our average excess 
of gold imports was $66,700,000 yearly. It 
was this gold in our bank reserves which 
permitted the rapid business expansion of 
that period. 

Similar conditions followed the great in- 
crease in our exports of merchandise which 
began in 1896, and again the great move- 
ment of 1915 and following years. 



61 



A CENTURY OF PRICES 

THE MAJOR CYCLE 

The small graph also defines clearly the 
swing of the ** major cycle" of prosperity 
and depression. Without attempting to go 
deeply into fundamental causes, we may 
note that the year 1916 in the current cycle 
appears to correspond closely to the years 
1898 and 1878 in the two preceding cycles, 
after which in each case generally pros- 
perous Business conditions prevailed for 
some years. 

Moreover, we cannot leave out of our 
calculations in this connection the very 
large payments due this country from Eu- 
rope for interest and principal of indebted- 
ness incurred during the last few years. It 
is a question just how these payments are 
to be met. But in any case they must cer- 
tainly tend to increase our national income 
as compared with the years before the war. 

The graph showing wheat and cotton 



62 



A CENTURY OF PRICES 

prices is less suggestive of general prin- 
ciples than that covering the average of all 
commodities. The two important factors 
which cause abnormally high prices for 
wheat in certain years are wars and crop 
scarcity. Their effect is plainly shown and 
the reasons for it are self-evident in view 
of what has been said in regard to the move- 
ments of commodity prices in general. 

The famine prices for cotton in the Civil 
War were due to the blockade of Southern 
ports — practically no cotton being raised 
anywhere else in the world at that date. 
Since cotton is easily stored and can be 
carried over from year to year, speculation 
has in recent years become a notable fac- 
tor in its price. Producers have made 
strong efforts, by storing their cotton and 
by reducing the acreage devoted to it, to 
maintain prices at a good level. Since fixed 
prices were not applied to cotton in the 



63 



A CENTURY OF PRICES 

World War, it reflected fully the specula- 
tive spirit and the exceptional demands of 
the time. 



64 



j^^yr\jA.< 6<^^ C^-^"^^^^-'^-^ ^^ 



1845 



1850 1855 



I8G5 1870 1875 1880 1885 1890 1895 1900 1905 1910 1916 1920 



Z40| f M 1 1 1 1 ^^ 1 1 1 1 M < 1 1 1 1 1 M ' 1 1 1 1 1 1 1 M 


1 1 1 M 1 — 1 1 1 1 1 1 1 1 1 uJ-|-|^u 1 1 i^ I 1 1 L u^^ 1 |Z40 






230 \ : ' -^ —---^■-'. 


- — -j — \ -±- t|-- Z30 




■ - -4 == ■^--- - -- - - 


1 ■ " ■ " ' ■ 1 ■ ■ - ■] J , r ■ 




ZZO-[|h:__.,_rn-|^-h^ — h+jf:r±--4ife ?t4=_ 

— ^ H"'" n^l'-i !' ■ 


3-^--.^---=..;[::g--[- -^ - ZZO 


_3j ^^ :^ •: ;^^ , 


^ TF=^"=^- =i>' ^^ -^ 7in 


ZIO„c ^-c^ -ti" ^ ^ 


, ^^__l > ?, ^- -t- z- 210 


200 2. -.-£...{ - ..r<-0 .. , !2 


+1 _ -kj-tS: § .^ - ZOO 


_ 1, _ — J==> . ■ , 


:^ _j ^ °~ 


190 ^ -^-^ -^ r b 


- _ -L=_. 1-7 - 130 


-=> - ■ — ^- 1 — ^— ' 




lon^^- [- hH — 1 - k- - 1 44- o 4- 


• — (r> 


IP ^ 1_ ^^ 


-g ^ — hn 180 




: - 00 "^ 


17(1 H ' V| 


- - - it 1 i7n 


l/U - 1 1 M 1 1 1 1 M 1 M j - '/frrrT-l ^ h" 




icn LEVEL OF ; it ^ z_ 




bU i.»-»i.t. V. . _ • 




fOMMODITY PRICES \ 


..... 1 M 


icn -z.:. 1 1 1 1 1 1 1 1 1 1 1 . I?, A 


: _______ 4^^—.-^^^—^ TT""" '50 


\Af\ Z- s: 


i (^ Mfi 


140 tz A 






:___= z__= zL ii^^ jf; _ ,20 


1 in 1 1 1 1 1 1 1 1 1 L»»ri ^X 1 1 ■• A. 1 T iV * 1 1^ 


rT~ -i ' iNr " 1 in 


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A4-^\'/0un"5 Index— -: ' ^ ^ 

t\-^'dU 1 1 1 i 1 1 -/Tf -+ Mill - - -- 100 


9o^:ytilEiJEEE==EiE:EE:E=:: 


^ww-rnlE^+t-TuI 1 1430 


80 --4^--^^ ^-r^— ----- T-- t= ___... 


-T_ t 1 ^ ■-. 1 .4 \ / - ' ■ '" - - ^" 


7o' ' 1 iH^N-^4 ,T 1 1 ^ ^ ITTFI ^ 1 , iTrr 


^ ' I"" "' ''''^"' ' ' : ■ 1 i 4 4 H M M Ml l-l H70 



•w- 



I■;lIklRT'^ index of cuniinudiu pricL-?, a-> prcitar 

cd down to 18{<9. Down lo 1850 tlii; liguris uik 

wire practically the samv, and from that point I 

■ditics. The various indices comjiilcd I 



dotted line shows prices in the dcprecial' ■! 
coniiiHK.iKs line sliuws the cqin'valcnt in gold. The gold prices are not strictly comparable with prices 
prices of many articles coiuini.-cd to be fixed by custom, so that the full eflect of the gold premium 




r,^ Y^hrt^^ 



300 
Z50 
ZOO 
150 



545 
I8Z0 1825 1830 1835 1840 1845 1850 1855 I860 1865 1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 I9Z0 



300 
250 

200 
150 
IQO 
50 

75 
50 
25 




trT 



wm 



rr-5 






WHEAT-No.2. AT CHICAGO 






i| 



'I. 



FTW 



"<^TTTT 



•M 



I' 



f? 



190 



120 



CASH COTTON AT NEW YORK 




Calendar Years I8Z0 to 1869 
CofhonYcor5l87lffll3l8.; 

i 



miii^ 



TF 



W 



ffi 



.11 






?jiiiifi«i 



''lf-lf-i««.f 



(I.I 



ll,.>ifl"l 



m 



i.ii 



Win \T ANO Canu.N — There lui been a cuiiiiiiuout m:irkei mr cash coitun at .Sew York iince IHJU. but >'" wheal Ihf price* before 
the Civil War viri.-d greatly in differrat pari, ot the omntry and there wa« no »uch »)«trm o( standard Krad'* »» "O* >"'" "« •»•"■■ 
Alter the complefion of the Frie CjnaJ. A!hany rcciipied ihotr the «arnr reblive position in the trade a> Chicago occupiet n»>w, but the 
price records •" ■''<• '""• »••'■■ ' '' -.n ,r^K .l.-,tr,..„i t,> rt,. ,',,. >, jh, jjm^ Capitol a few year. ago. 



CHAPTER IV. 

CAUSES OF CHANGES IN INTEREST 
YIELDS AND MONEY RATES 

'T^ HE fact is obvious that the average 
■*■ investment yield obtainable from 
bonds or loans must depend on the supply 
of capital as compared with the demand for 
it. It is essential, therefore, in considering 
the changes shown on the graphs of bond 
yields and money rates, to examine the con- 
ditions atfecting capital during the period 
coveredo 

**When people talk to me about money 
and capital," complained a member of the 
Stock Exchange, ^^I begin to get a head- 
ache." To avoid such headaches it is neces- 
sary to understand thoroughly what capital 
is, a point in regard to which even bankers 
of long experience are often hazy. 



69 



A CENTURY OF PRICES 

To begin at the beginning, all capital is 
the product of labor. It is labor-product 
saved, set aside and stored up to aid in fur- 
ther production, instead of being used up 
in current consumption. A farmer, for ex- 
ample, can spend his yearns surplus income 
for a new piano, which is not capital unless 
it can be shown that it will increase the 
total production of the farm; or he may 
spend his surplus on a tractor, which is 
capital because it will increase his product. 
And if he lends his year's surplus to a 
neighbor, or turns it over to a bank, or in- 
vests it in a bond, he is entitled to interest, 
because in that case he is denying himself 
both the piano and the tractor. 
FACTORS IN THE SUPPLY OF CAPITAL 

The supply of capital available at any 
time, therefore, will depend on a number 
of considerations: — 

(1) The total amount of labor applied. 



70 



A CENTURY OF PRICES 

To accumulate capital a nation must be in- 
dustrious. A sluggish, unambitious popu- 
lation merely earns its living as it goes 
along, without piling up any surplus. 

(2) The efficiency of labor — the amount 
of the product in comparison with the labor 
applied. This depends chiefly upon the 
extent to which machinery is employed, 
but also upon the energy and faithfulness 
of the workmen. 

(3) What is being done with the labor- 
product; whether it is: 

(a) Being used up for current consump- 
tion — for food, clothing, luxuries, pleasure 
trips, etc. 

(b) Being invested in tools, equipment, 
and improvements which will bring an im- 
mediate return in the form of increased 
production. 

(c) Going into improvements of a more 
permanent character, which will be of public 



71 



A CENTUEY OF PRICES 

or private benefit eventually, but will not 
yield any early returns in the form of 
greater production. 

The third consideration above mentioned 
brings up another very important point, 
namely, the rapidity with which capital 
circulates when used in different ways. 
For very little capital is permanently fixed 
in one form. 

The tractor wears itself out in creating 
an increased product of other things; its 
value is gradually transferred into those 
other things ; the capital invested in it cir- 
culates. The factory depreciates. The rail- 
road's rails, ties and roadbed have to be 
constantly renewed. Its stations have to 
be repaired frequently and finally become 
antiquated and have to be rebuilt. 

Even the Eoman viaducts, perhaps the 
most permanent investment of capital in 
history, eventually fall into disrepair. The 



72 



A CENTURY OF PRICES 

original investment in the Suez Canal, or 
in New York's water works, might perhaps 
be mentioned as permanently fixed, al- 
though additional expenditures are con- 
stantly necessary for maintenance and 
betterments. 

So the extent to which any particular use 
of capital depletes the general supply de- 
pends not only on the amount of capital 
used but also on how long it is used. The 
farm tractor may, by increasing the far- 
mer's product, reproduce its value in a year. 
A new barn might not pay for itself, 
through increased production due to better 
facilities, in less than twenty years. Even 
if the first cost of the two were the same, 
the barn would eventually require twenty 
times as much use of capital as the tractor. 

Capital may be roughly classified accord- 
ing to the rapidity with which it circulates, 
as follows; — 



73 



A CENTURY OF PRICES 

(1) Capital in the form of commodities. 
Some of these are luxuries, but most of 
them contribute toward further production 
and are therefore capital. In this form 
capital circulates rapidly. 

(2) Capital invested in machinery or 
equipment, or in enterprises which will be 
immediately productive, circulates less rap- 
idly, as a rule, than commodities, but more 
rapidly than in the forms mentioned below. 

(3) Investments in enterprises which 
will eventually yield a return, but only after 
considerable delay. 

(4) Expenditures for public benefit, 
such as court houses, schools, playgrounds, 
baths, etc. These contribute indirectly to 
the future productive capacity of the 
people. 

(5) Investments in enterprises which fail, 
or expenditures in war. This capital stops 
circulating. In some cases a small part 



74 



A CENTURY OF PRICES 

of it may, however, be salvaged. 

An increased application of capital to 
any one of these five divisions will neces- 
sarily tend to deplete the current supply of 
capital, and therefore to bring higher in- 
terest yields; but the effect in this direc- 
tion will be far greater and more permanent 
if the capital goes into relatively fixed 
forms, or into forms where its circulation is 
slow, than it will be when the capital is ap- 
plied where it will circulate rapidly. 

Hence the great importance of distin- 
guishing between fixed and circulating 
capital. 

RISE AND FALL OF BOND YIELDS 

In Chapter II, in discussing the relation 
between the level of English commodity 
prices and the yield on consols, we noted 
the close correspondence in the general 
trend of the two. In comparing the graph 
of U. S. Corporation Bond Yields with that 



75 



A CENTURY OF PRICES 

of American Commodity Prices (discussed 
in Chapter III), we find tlie same broad cor- 
respondence. 

We are now in a position, after refresh- 
ing our memory as to the nature of capital, 
to define more accurately the reasons for 
this correspondence. The superficial reason 
why bond yields rise with rising commod- 
ity prices is that the investor, finding his 
real income shrinking although his money 
income is unchanged, demands a higher 
rate of interest, but he would not be able 
to obtain this higher rate if it were not for 
the fact the supply of capital is smaller 
in comparison with the demand for it. And 
the reason why higher commodity prices so 
greatly increase the demand for capital is 
that they bring a nearly proportional in- 
crease in the cost of capital investments in 
all of the five divisions above enumerated. 

The capital which, at any one time, exists 



76 



A CENTURY OF PRICES 

in the form of commodities, is only a small 
part of the total capital of the conntr^^ and 
circulates rapidly. Therefore a rise in the 
prices of commodities wonld have only a 
moderate effect toward increasing the de- 
mand for capital. But all investments of 
capital (nsnally after passing through the 
form of securities, as previously explained) 
are first expended on materials and labor 
—that is, on commodities and on wages, 
which roughly follow changes in the price- 
level of commodities, though usually lag- 
ging behind somewhat. 

If, for example, the price-level of com- 
modities has risen 50 per cent, the cost of 
a new courthouse, or a new railroad, or a 
mine, or a subway system, will also be 
found to have risen nearly 50 per cent; so 
that the amount of capital required for in- 
vestment in relatively fixed forms rises in 
rough proportion with the rise in commod- 



77 



A CENTURY OF PEICES 

ity prices. It is this increase in the cost 
of fixed forms of investment which rapidly 
depletes the supply of investment capital 
and therefore raises its price, which is best 
expressed in the form of the average yield 
on bonds. 

During a period of falling commodity 
prices the situation is, of course, exactly 
reversed, so that bond yields tend to follow 
commodity prices downward. 
DIVERSION OF CAPITAL INTO FIXED 
FORMS 

Another important element affecting the 
demand and supply of capital is the rela- 
tive extent to which capital is diverted into 
fixed forms, especially those expenditures 
which contemplate a somewhat remote 
public benefit ; or into investments in enter- 
prises which prove failures, or the cost of 
wars. 

The Panama Canal, the New York State 



78 



A CENTURY OF PRICES 

barge canal, the New York City subway 
system, are examples of undertakings that 
have absorbed great quantities of capital 
from which only a trifling immediate return 
can be expected. Municipal and State ex- 
penditures for varied improvements have 
increased rapidly in recent years, and how- 
ever desirable such investments may be 
with a view to the longer future, immediate 
cash returns from them are apt to be small. 

And added to these factors came the tre- 
mendous depletion of the whole world's 
capital in the war. 

It is a question, also, whether the peo- 
ple's disposition to save has not grown 
less within the last two decades— whether 
the average man does not now save a 
smaller percentage of his income than he 
saved in the first years of the twentieth 
century. If so, this tends to cut off the 
supply of capital at its source. 



79 



A CENTURY OF PRICES 

These several influences tend to act in 
harmony. Rising commodity prices in- 
crease profits — as measured in money — and 
infuse the public in general with a spirit of 
liberality in expenditure, so that costly im- 
provements are more readily undertaken, 
living expenses grow at the expense of sav- 
ings, and the people are more prone to in- 
vest in doubtful speculations or fake stocks. 
In time of war, also, great expenditures of 
capital coincide with a rapid rise in com- 
modity prices. 

The great fall in bond yields from the 
period of the 70s to 1900 was partly due to 
the better standing and stronger protection 
of our corporation bonds as a whole in the 
later years ; but it was also largely due to 
the great increase in production of goods 
as a result of improvements in machinery 
and transportation. When labor produces 
more goods it is naturally easier to accumu- 
late capital. 

80 



A CENTURY OF PRICES 

MONEY RATES 

Money rates and bond yields mutually in- 
fluence each other, since both represent the 
return on the use of capital; but since the 
term ^* money rates'^ is applied only to 
loans for short periods, changes in these 
rates are chiefly dependent upon temporary 
conditions, while changes in bond yields are 
chiefly dependent upon conditions of a more 
permanent character. 

A comparison of the two graphs shows 
that sharp changes in money rates are sym- 
pathetically reflected in the minor move- 
ments of bond yields, but that money rates 
have very little to do with the broad sweep 
of the bond market. 

Rates on call money and 30 or 60-day 
loans have in the past fluctuated so quickly 
as a result of temporary conditions that 
they are of little value for comparison over 
long periods. Commercial paper affords the 



81 



A CENTUEY OF PEICES 

true that commercial paper affords the 
broadest and best index to general money 
conditions. 

Unusually high money rates and the 
minor and temporary upward swings in 
bond yields are commonly due to an over- 
extended condition of bank loans — ^that is, 
a scarcity of credit accommodation. Scar- 
city of credit means that borrowers must 
pay a higher price for it, so money rates 
rise. And if a higher rate of interest is ob- 
tainable from short loans than from bonds, 
capital is temporarily attracted away from 
the bond market, and owners of bonds are 
tempted to switch into commercial paper or 
time loans, so that bond prices fall and 
yields rise. 

This condition of overextended bank 
loans may be due to too great optimism in 
business circles, which leads business men 
to branch out too widely and too rapidly. 



82 



A CENTURY OF PRICES 

and thus to use up an undue proportion of 
the credit available; or it may be due to 
events which arouse a widespread feeling 
of fear as to the future, so that there is a 
general desire to call in loans and contract 
credits. Before long the first condition is 
very apt to precipitate the second, but the 
second does not necessarily imply the first. 

Thus in 1857, 1873, 1893 and 1907 the pri- 
mary cause of high rates was overexpan- 
sion. But in 1861 fear was aroused by the 
beginning of the Civil War ; in 1890 by the 
Baring failure; in 1896 by danger to the 
gold standard; in 1914 by the outbreak of 
the World War ; and in none of these cases 
was any special overexpansion in evidence. 

The high money rates reached in most of 
the years previous to 1874 reflect in a very 
interesting way the scarcity of credit and 
liquid capital in those times. The high 
figures were usually reached in the fall, 



83 



A CENTURY OF PRICES 

when the crops were being moved. Condi- 
tions of doing business when an average 
rate of 10 per cent must be paid for money 
are entirely different from those when the 
average rate is 5 per cent. Before and dur- 
ing the Civil War any firm had to earn large 
profits in order to stay in business, and the 
constant wide fluctuations in rates intro- 
duced an element of uncertainty now hap- 
pily absent. 

The extreme high rates of panic years, 
as in 1857, 1861 and 1873, simply mean that 
during the panic periods money was prac- 
tically unobtainable. Failures were so nu- 
merous that even the highest class two- 
name commercial paper was subject to sus- 
picion. Yet that suspicion was not the chief 
cause of the high rates. The real reason 
was the absolute lack of loanable funds. 

We have today very little conception of 
conditions such as those of the panic of 



84 



A CENTURY OF PRICES 

1857, for example. Tlie newspapers at that 
time reported that in some instances 2% 
per cent a day was bid for call loans. Lead- 
ing banks and old, conservative business 
houses were falling right and left like nine- 
pins. For loans of four to six months on 
prime commercial paper 3 per cent a month 
was offered, and doubtless higher rates 
would have been paid if there had been a 
prospect of bringing out the money. One 
of the market reports stated that the money 
market was in a state of ** anarchy." Gold 
commanded 8 per cent premium at Balti- 
more, and the general disorganization of 
business was far beyond anything known to 
the present generation. 

Under the improved banking methods 
now in use it is to be expected that fluctua- 
tions in money rates will be much nar- 
rower than in even the recent past. Com- 
mercial paper rates during the war were 



85 



A CENTURY OF PRICES 

successfully stabilized at or below 6 per 
cent, and while it is possible that periods 
of rapid expansion may sometimes carry 
them temporarily over that figure, it is 
highly probable that extremely high rates 
for time money and commercial paper will 
no longer be a recurrent feature of the mar- 
kets. 



86 



J By t.uS eerrpy^^^^^^f^-^t 



I8G5 1870 1875 



1885 1890 1895 1900 1905 1910 1915 I9Z0 




I; NM VitiDs— This graph is drawn iruin 'ujr :..::..._; . ■.., ..^.,,..^. .-.;^;.,:„,: < j,-<.i..;*i,..ii. I ;,<: i„,ii.), .i.tiuJ.il *iri 
Mi-v-rssarily chanRcd from time to time, hit: the n -t rr*'i!t i? a prct'o iaithiul rcric<:ii..n i.i cor|x>raiiun bond pricct in ihc United Slalr». 
It IS necessary to show the yield rather than an average of bond pric-* tecaiue price* are affected b> the maturity of the varioua hond». 



/ (ZcJ(Jh /^rt«c*<. Cieti^ .. -^f^A^J' 




the 



cntic r«'>r<l oi money rate* In-f'^rc 1870. 1 he ratc» were compiled from 

paper Was selected as a better reflection ol »«"*' '°"f'''°"'^^^" L'' ""^ o7Ti57. but no adequate record, were found before IMl. 
^b Trrlr::; ^^^V.;'^^'^^^ fa^n^llil.LM^raT/rl.e^^Tbe evden. «arci.> of capital and .he h..h 
obtained previous t" I'*"- *l"-'l ^" m 



> carry the graph back to the 
monev was unobtainable 
light on our financial hi«iory. 



CHAPTER V. 

PRINCIPLES OF STOCK PRICES 

By Gr. C. Selden 

A T first glance the accompanying graph 
"^"^ of stock prices since 1860 presents an 
appearance of lawless irregularity. But on 
further examination it proves to be one of 
the most interesting of the various graphs 
we have discussed. 

First, what is the relation of stock prices 
to the other main factors discussed in pre- 
ceding chapters? 

Comparison with commodity prices 
(Chapter III) shows at once that there is 
no such general correspondence between 
stocks and commodities as we found to 
exist between bond yields and commodities. 



91 



A CENTUEY OF PRICES 

Nevertheless a sharp rise in commodity 
prices has a strongly bullish influence on 
the stocks of companies which are free to 
advance the prices of their products in ac- 
cordance with demand. In recent year^ 
this has not included railroads and public 
utilities; for while those companies have 
been granted advances in rates, the ad- 
vances have not been sufficient to keep up 
with rising costs of operation. 

RISING COMMODITIES BENEFIT 
INDUSTRIALS 

But owners of industrial stocks have 
benefited not only from the general infla- 
tionary effect of rising commodity prices, 
but they have also benefited further and 
very greatly at the expense of bondholders. 

Suppose, for example, that an industrial 
company is capitalized at $300,000, of which 
$100,000 consists of 6 per cent bonds — ^mak- 
ing the annual interest charge $6,000 — and 



92 



A CENTURY OF PRICES 

$200,000 is in the form of stock on which 6 
per cent, or $12,000, is being earned an- 
nually. Now let us suppose that a great 
rise in commodity prices occurs, which 
doubles this company^s cost of production 
and also doubles the selling price of its 
products. It is evident that its profits — in 
dollars — ^will also be doubled. 

The bondholders do not share in this in- 
creased profit. Their return is fixed at 
$6,000. But the company's profits appli- 
cable to its securities have increased from 
$18,000 to $36,000. So $30,000 is now left 
for the stock, or 15 per cent on the $200,000 
outstanding. And this without any change 
in the company's per cent of profit on its 
output. 

This shows us one of the principal causes 
of the growth in the profits of industrial 
companies during the period of rising com- 
modity prices which began with 1898, and 



93 



A CENTURY OF PRICES 

wMch from 1915- to 1918 was such a con- 
trolling factor in our whole economic life. 
The same principle must necessarily oper- 
ate in any great advance in commodities, 
while a sharp decline in commodities will 
cut down the earnings on stocks with cor- 
responding rapidity. 

In the case of a company which, in addi- 
tion to bonds, has preferred stocks on 
which the dividend return is limited to a 
fixed per cent, the effect on the earnings for 
the common stock is even more marked. 
If, as is sometimes the case, three-quarters 
of a company^s earnings on a low-price 
basis were required for bonds and pre- 
ferred stocks, a doubling of commodity 
prices should multiply the earnings for the 
common stock by five. 

PANICS AFFECT ALL SECURITIES 

In comparing bond yields and money 
rates with stock prices, we see that panics. 



94 



A CENTURY OF PEICES 

even of a relatively minor character, affect 
all three. Bond and stock prices fall and 
money rates rise. The effect on bonds is 
temporary and in the case of minor panics 
unimportant. 

The years of high money rates — 1860, 
1865, 1873, 1882, 1890, 1893, 1896, 1907, 
1914 — ^have also included a sharp fall in 
stocks, with the single exception of 1882. 
In that year the high rates were due to the 
constant absorption of money by the U. S. 
Treasury, rather than to general economic 
conditions. 

On the other hand, there were consider- 
able declines in stocks in 1884 and 1903 
without much effect on commercial paper 
rates. In both cases the panicky conditions 
were practically confined to Wall Street, 
and call money was sharply affected — 
reaching 3 per cent a day in 1884* — ^but 
since commercial conditions were good, 

*A few loans were reported as haying been made 
at 5 per cent a day. 

95 



A CENTURY OF PRICES 

mercantile borrowers were able to postpone 
their requirements until tbe pinch in Wall 
Street was over. 

THE MINOR CYCLE 

From the standpoint of general prin- 
ciples, the most interesting point connected 
with stock prices is the comparatively reg- 
ular swing noticeable since 1884, which has 
come to be called **the minor cycle." An 
examination of the graph shows that low 
prices for stocks, accompanied in most cases 
(but not all) by relatively high money 
rates, have occurred every three or four 
years with an astonishing degree of reg- 
ularity. These years have been as follows : 
1884, 1887, 1890, 1893, 1896, 1900, 1903, 
1907, 1910, 1914, 1917. 

In between these low points there has 
been in each case an upward surge in stock 
prices. In most instances there have been 
about two years of rising prices and one 



96 



A CENTURY OF PRICES 

year of decline. The reason for this will 
appear later. 

A regular swing of this character, oc- 
curring throughout such a long period, in- 
dicates the strong probability of some gen- 
eral law. And this probability is increased 
by the great variety of explanations ad- 
vanced for the recurrent declines. 

The panic of 1884 was alleged to be due 
to the Grrant & Ward failure, accompanied 
by the collapse of the Marine Bank and fol- 
lowed by a few other bank failures. For 
the decline of 1887 only the most general 
reasons could be assigned, such as over- 
expansion, over-extension of mercantile 
credits, etc. The drop of 1890 was assumed 
to be the reflection on this side of the 
Baring failure in London. 

The panic of 1893 was a mystery to cur- 
rent commentators. Later judgments have 
attributed it to a variety of reasons, of 



97 



A CENTURY OF PRICES 

which the Government's continued heavy 
coinage of silver and dwindling supply of 
gold perhaps carry the weight of the most 
authority. The decline of 1896 was imme- 
diately due to the fear that the pending 
election would result in a silver basis for 
our currency. 

The low prices of 1900 were mostly con- 
fined to railroad stocks. The industrials 
were then feeling the benefit of rising com- 
modity prices. The movement was gener- 
ally considered a reaction from excessive 
speculation. The bear market of 1903 was 
labeled the ** undigested securities panic," 
and thought to be due to the over-issue of 
industrial stocks. 

In 1907 came a ** money panic," again due 
to over-expansion. For the moderate de- 
cline of 1910 falling railroad earnings and 
the Government's intention to prosecute 
leading corporations under the Sherman 



98 



A CENTURY OF PRICES 

anti-trust law were assigned as reasons. 
The low prices of 1913 were due to general 
depression and were followed by the war 
panic in 1914. The great decline of 1917 
was in part due to our entrance into the 
war and the prospective great demands for 
capital for war purposes. 

In nearly every instance over-expansion, 
over-extension of loans, over-speculation, 
or over-something-else, has been mentioned 
as one of the causes contributing to the de- 
cline. Is it not at least probable that these 
*' overs" are the main cause of the minor 
cycle, and that the special events of the time 
are contributing factors which make 
greater or smaller a decline which would 
have occurred in any case! 

THE FUNDAMENTAL CAUSE 

The fundamental cause of the minor cycle 
is the law of action and reaction, the build- 
ing up process and the falling down process. 



99 



A CENTURY OF PRICES 

At low prices, stocks are mostly in the 
hands of courageous, outright investors, 
who cannot easily be frightened into sell- 
ing. As prices rise, more and more stocks 
pass into the hands of buyers for profit 
only. The higher quotations go, the more 
the public comes into the market. Nothing 
so strongly stimulates speculative purchases 
as the spectacle of rising prices. 

Buyers at high prices are necessarily of 
a weaker class — weaker in judgment and 
therefore weaker in resources — ^than buyers 
at low prices. After a prolonged and exten- 
sive advance, a great volume of stocks be- 
comes lodged in the hands of these weak 
holders, while many of the stronger class 
of investors have realized at the high prices 
and transferred their funds into more 
stable securities, such as bonds or short 
term notes. 

Eventually these weak speculative hold- 



100 



A CENTUEY OF PRICES 

ers have bought all they want, or some of 
them become discouraged, or some unfavor- 
able event dampens their ardor. They then 
begin to sell out on each other — since prices 
are too high to attract the genuine investor 
for income. 

For such a situation there is no cure ex- 
cept a decline to a level which will attract 
the stronger class of buyers. So we next 
have the downward swing of the cycle. How 
far the fall must go depends mostly on the 
supply of liquid capital, which is roughly 
indicated by money rates. 

During the rise, with the public active in 
the market, there is a great deal of shifting 
from one holder to another, accompanied 
by reactions, temporary slackening of ac- 
tivity, and renewed advances. Investors 
part with their holdings gradually, as each 
becomes satisfied with the prices to be ob- 
tained. But the decline consists mostly of 



101 



A CENTURY OF PEICES 

weak holders letting go to other weak hold- 
ers. For that reason the fall is more rapid 
than the advance. 

In the meantime much the same thing is 
occurring in many lines of industry. Specu- 
lation is by no means confined to stocks — 
^*the instinct of anticipation" is general. 
Buyers of goods try to purchase not only 
at the cheapest place but very often at the 
cheapest time also. The bargain sale at- 
tracts the housewife because she believes 
the goods are cheaper than they were last 
week or may be next week. She is a specu- 
lator, though she doesn't realize it. 

The morning newspaper would seem to 
be something which no one would try to 
buy at the cheapest time. Yet some com- 
muters who have to pay an extra cent for 
a paper at their station buy only one to 
read on the train, waiting to buy another 
at the regular price in the city. 



102 



A CENTURY OF PRICES 

In the larger affairs of business, almost 
every purchaser tries to buy as far ahead 
as possible when he thinks prices will rise, 
and to delay buying as long as possible 
when he thinks they will fall. Rising prices, 
unless already very high, bring increased 
orders, but buying falls off on declining 
prices until it is believed that the bottom 
has been reached. 

In this way the spirit of speculation, 
unrecognized, or at any rate not called by 
that name, permeates all business, and the 
minor cycle in a modified form is a feature 
of industry as well as of the stock market. 
Any chart of steel prices, unfilled steel or- 
ders, pig iron production, or bank clear- 
ings plainly shows the modifying effect of 
the cycle. 

The importance of this in the present 
discussion lies in the mutual influence 
which the stock market and general busi- 



103 



A CENTURY OF PRICES 

ness conditions exert upon each other. A 
widespread willingness to buy in any in- 
dustry tends to increase its prosperity, for 
the time being. Its prosperity tends to- 
ward higher prices for the stocks of com- 
panies in the industry. And rising prices 
for the stocks tend to encourage business 
men to extend their undertakings — since 
many of them realize that the stock market, 
properly interpreted, is a valuable indica- 
ion as to future conditions. 

Each dog in a pack of hounds runs faster 
and longer because he sees the others run- 
ning ; and with all our intellectual develop- 
ment, this primary instinct remains. We 
catch each other^s enthusiasm or depres- 
sion. In any market where the spirit of 
speculation exists — and it would be hard 
to name any where it is wholly absent — 
rising prices once started tend to continue 
rising until they are obviously too high, and 



104 



A CENTURY OF PEICES 

falling prices tend to fall until they are 
obviously low. And that is the main part 
of the story of the minor cycle. 

FEATURES OF THE MINOR CYCLE 

The relation of money rates to the swing 
of stocks in the minor cycle is of interest,, 
but is not so direct or decisive as might at 
first be thought. It has usually been the 
case after a bull movement in stocks, that 
when prime commercial paper at New York, 
after a period of lower rates, advanced to 
a 6 per cent basis, the advance in stock 
prices proved to be practically over. Then 
money has remained around the 6 per cent 
basis, or in some cases higher, during the 
downward swing of the stock cycle. After 
the completion of the liquidation in stocks, 
the money rate has usually dropped, within 
a few months, to around a 4 per cent, basis, 
or in some instances lower. 

The highest money rate has corresponded 



105 



A CENTURY OF PRICES 

rather closely with the lowest prices for 
stocks, falling gradually as stocks began 
to rally, remaining for a time near a 4 per 
cent level, and then rising to 6 per cent as 
stocks reached their top. Theoretically, it 
might seem that the lowest money rate 
should correspond with the highest prices 
for stocks; but that is not the case, for 
speculation, once under way, carries stock 
prices upward even though the money rate 
rises at the same time. 

Another reason why money rates and 
stock prices do not move more in harmony 
is because, so far as the demand for money 
is concerned, stock speculation is the tail 
to the kite — ^the kite being the money re- 
quirements of general business. When 
business really needs money, it takes it 
away from the stock market. A bull mar- 
ket in stocks is based on surplus funds, 
which at the time are not needed for other 
lines of business. 

106 



A CENTURY OF PRICES 

It would, however, be a mistake to sup- 
pose that the structure of a bull market 
will not topple over until the money rate 
rises sharply. It sometimes falls of its 
own weight, so to speak, while money re- 
mains cheap. This occurred in the autumn 
of 1916, when the highest prices for stocks 
were made on a 3 3-4 per cent rate for com- 
mercial paper, and the rate did not rise to 
6 per cent until after the low prices of De- 
cember, 1917, were past. 

The Federal Reserve System, with its 
easy rediscounting, will prevent extremely 
high money rates and may have the effect of 
reducing the general average of rates some- 
what. It will not, however, seriously reduce 
the supply of money available for stock 
market purposes as compared with the past. 
Nothing else is so mobile as credit. Loan- 
able funds will seek the best rates as 
surely as water seeks its level. 

The minor cycle in industry is more 



107 



A CENTURY OF PRICES 

clearly and promptly reflected in the un- 
filled orders of the U. S. Steel Corporation 
than in any other statistics now available. 
These follow the swings of the stock mar- 
ket quite regularly, keeping three to six 
months behind stocks at the high and low 
turns. For that reason the minor cycle in 
stocks is decidedly helpful in forecasting 
coming conditions in the steel industry, 
with which other trades also strongly sym- 
pathize. 



108 




nil .,1 lalkutr', iiiJt.x ul tuiii.iiucJiU i.riti.-.-.. as l-rti.a 

lurt ii,g.i down to iiSiS). Down to 1850 Hic figuro uik.ii vmicii ii « 

frasnicnlary. In ISW Dun s anil 1 alkncr's indices wire practically the same, and from that point to date- Uun , 
avcraKc of wliolcsalc prices of all important commodities. The various indices compiled l.y different aiilhorilic^ ,ho»» only mmor varia- 
tions in tlie general trend. Dnrinn and after the Civil War the dotted line show.* prices in the depreciated currency of the ijiriwl, anjl 
•he continuous line shows the equivalent in gold. The gold prices are not siricllj comiarable with prices before and alter this |>«rio<J 
The prices of many articles continu.-t) to be fi.xed by custom, so that the full effect of the gold premium was not felt. 



BIBLIOGRAPHY 



Adams, H. C. Finance. 

Rabbeno, Ugo. The American Commercial 
Policy. 

Bagehot, Walter. Lombard Street. 

Baring, A. (Lord Ashburton). The Financial 
and Commercial Crisis Considered. 

Bastable, Chas. P, Theory of International 

Bastable, C. F. Public Finance. 

Beveridge, N. H. Unemployment : A Problem 
of Industry. 

Bilgram, H., & Levy, L. Cause of Business 
Depressions as Disclosed by Analysis of the 
Basic Principles of Economics. 

Bogart, Ee L. Economic History of the U. S. 

Bogart, E. L. Business Economics. 

Bowley, A. L. The Effect of the War on the 
External Trade of the United Kingdom. 

Bowley, A. L. The Elements of Statistics. 

Brace, H. H. The Value of Organized Spec- 
ulation. 

Brown, H. G. International Trade and Ex- 
change. 

Brown, J. B. Causes of Business Depression. 

Browne, Scribner. Tidal Swings of the Stock 
Market. 

Ill 



A CENTURY OF PRICES 

Burton, Theodore E. Financial Crises. 

Ohaddock, Robert E. State Banking Before 
the Civil "War, and the Safety Fund Bank- 
ing System in N. Y. State (U. S. 61st Con- 
gress, 2nd Session, Senate Doc. 5811). 

Chamberlain, Lawrence. Principles of Bond 
Investment. 

Clare, George. The A. B. C. of Exchange. 

Clare, George. The Money Market Primer. 

Conant, C. A History of Modem Banks of 
Issue with Account of Economic Crises of 
the 19th Century and Crisis of 1907. 

Copeland, Melvin T. Business Statistics. 

Copeland, Melvin T. Cotton Manufacturing 
Industry of U. S. 

Crowell, P. How to Forecast Business and 
Investment Conditions. 

Daggett, Stuart. Railroad Reorganizations. 

Davenport, H. J. The Economics of Enter- 
prise. 

De Launay, L. The World's Gold. 

Dewey, David R. Financial History of" the 
U.S. 

Dewing, A. S. Corporate Promotions and 
Reorganizations. 

Disbrow, C. W. Periodic Financial Panics : 
The Cause and the Remedy. 

Dunbar, C. P. Chapters on the Theory and 
History of Banking. 

Ely, R. T. Monopolies and Trusts. 

112 



A CENTURY OF PRICES 

Emery, H. C. Speculation on the Stock and 
Produce Exchanges of the U. S. 

Fisher, Irving. Why is the Dollar Shrinking ? 
A Study in the High Cost of Living. 

Fisher, Irving. Nature of Capital and In- 
come. 

Fisher, Irving. Rate of Interest: Its deter- 
mination and relation to economic phenom- 
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Fisher, Irving. Purchasing Power of Money: 
Its determination and relation to credit, 
interest and crises. 

George, Henry. Progress and Poverty. 

Gibson, T. W. Cycles of Speculation. 

Giffen, Robert. Economic Inquiries and 
Studies. 

Hall, Henry. How Money is Made in Security 
Investments. 

Hawley, F. B. Enterprise and the Productive 
Process. 

Hickemell, N. F. Methods of Business Fore- 
casting Based on Fundamental Statistics. 

Higginson, J. L. Tariffs at Work. 

Hirst, W. The Political Economy of War. 

Hobson, John A. Gold, Prices and Wages, with 
an Examination of the Quantity Theory. 

Hobson, John A. Causes of the Rise in Prices 
(U. S. 62nd Congress, 3rd Session, Senate 
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Hobson, J. A. Evolution of Modern Capital- 
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113 



A CENTURY OF PRICES 

Hull, G. High Prices and Industrial Depres- 
sions. 

Hyndman, H. M. Commercial Crises of the 
19th Century. 

Jevons, W. C. Investigations in Currency and 
Finance. 

Jevons, H. S. Essays in Economics. 

Jevons, W. S. Money and the Mechanism of 
Exchange. 

Johnson, E. R., and Huebner, G. G. Railroad 
Traffic and Rates (2 volumes). 

Jones, E. D. Economic Crises. 

Juglar, 0. Brief History of Panics and Their 
Periodical Occurrence in the IT. S. 

Kemmerer, Edwin W. Money and Credit: 
Instruments in Their Relation to General 
Prices. 

Kemmerer, Edwin W. Seasonal Variations in 
the Relative Demand for Money and Cap- 
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Kinley, David. Money and Currency. 

Kinley, David. Use of Credit Instruments in 
Payments in the U. S. (U. S. 61st Congress 
2nd Section, Senate Doc. 339.) 

Lauck, W. J. Causes of the Panic of 1893. 

Lau£^hlin, James L. The Principles of Money. 

Laughlin, James L. Money and Prices. 

Laughlin, James L. Suggestions for Banking 
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114 



A CENTURY OF PRICES 

Layton, W. T. Introduction to the Study of 
Prices with Special Reference to the 19th 
Century. 

Lyons, W. H. Corporation Finance (Com- 
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Margraif, A. W. International Exchange. 

Marshall, Alfred. Principles of Economics. 

Mayo-Smith, Richard. Statistics and Econ- 
omics. 

Mitchell, W. C. Gold, Prices and Wages un- 
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Mitchell, W. C. History of the Greenbacks, 
with Special Reference to Economic Conse- 
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Mitchell, W. C. Business Cycles. 

Moore, H. L. Economic Cycles: Their Law 
and Cause. 

Moore, H. L. Forecasting the Yield and Price 
of Cotton. 

Noyes, Alfred. Forty Years of American 
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Pratt, S. S. The Work of Wall Street. 

Perrin, J. Trade Fluctuations and Panics. 

Raffalovich, A. Les Crises Commerciales et 
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Ripley, W. Z. Railroads : Rates and Regula- 
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Rodbertus, J. K. Overproduction and Crises. 

Selden, G. C. Psychology of the Stock Mar- 
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115 



A CENTURY OF PRICES 

Selden, G. 0. Investing for Profit. 

Selden, a. 0. A. B. C. of Bond Buying. 

Smart, William. Studies in Economics. 

Smart, William. Distribution of Wealth. 

Spragxie, Ezra. The Accountancy of Invest- 
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Spragne, 0. M. History of Crises under the 
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Streighthoff, F. H. The Standard of Living 
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Streighthoff, F. H. The Distribution of In- 
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Taussig, F. W, Tariff History of the U. S. 
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Van Hise, 0. R. Concentration and Control. 

Veblen, Thomstein B. Theory of Business 
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WalkOT, Francis, Amasa. Discussion in Econ- 
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Walker, Francis, Amasa. Money in Its Rela- 
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Wabh, C. M. The Measurement of General 
Exchange Value: The Fundamental Prob- 
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Webb, Sidney and Beatrice. History of 
Trade Unionism. 

Webb, Sidney and Beatrice. Industrial Dem- 
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116 



A CENTURY OF PRICES 

Weld, L. D. H. The Marketing of Farm 
Products. 

Wells, David A. Recent Economic Changes 
and their Effect on Production and Distri- 
bution of Wealth and Well-being of So- 
ciety. 

Withers, Hartley. Stocks and Shares. 

Withers, Hartley. Money Changing. 

Withers, Hartley. The Meaning of Money. 

Zartman, L. U. The Investments of Life In- 
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. Annual Report — Comptroller of 

the Currency. 
. Annual Report — Director of the 



Mint. 



Board. 



U.S. 



Annual Report — Federal Reserve 
Annual Report — Treasurer of the 



Bulletins of United States Depart- 
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Cotton Facts. Edited by Geller, C. 
Federal Reserve Bulletin (Month- 



ly) Federal Reserve Board. 

History of Prices During the War 



(1914-1918), Price Section, War Industries 

Board— Edited by W. C. Mitchell. 

. Metal Statistics— Published by the 



American Metal Market Company. 

. Monthly Summary of Foreign 



117 



A CENTURY OF PRICES 

Commerce of the U. S. 

National Monetary Commission 



Publications. 

Readings in the Economics of the 



War— Edited by J. Maurice Clark, Walton 
H. Hamilton and Harold C. Moulton. 

Reports of the American Iron and 



Steel Institute. 

Report on Cotton Exchanges — 



Commissioner of Corporations. 

Reports of the Department of 



Agriculture. 

Report of United States Industrial 



Commission. 

Special Census Reports on Wealth, 



Debt and Taxation. 

. Statistical Abstract of the U. S. 

The Making and Using of Index 



Numbers (Bulletin of U. S. Department of 
Labor, No. 173). 



118 





THE ELEMENT OF AGE IN BUSINESS 




^>^i::f::pi ■^-^£sr;rr^~l:;:;?:;^"^5:''°'• 


This is the age of caution 


a. man must not specu- 


20 ^V^ !<»«• i d.y. oJ g.Ke .re .llowed. 


late, for he has all to lose 
and nothing to gtin. 


ThUUilie /^VJ 


He looks lor secu.ily. 


vJhea Ih. .on ihi.l. h. 
knowt more lh>D hi< 


»S,^^ 40 
3oV„^^ NOW OR; NEVER 


not high rates o! inte.esl. 
At 65, 85% of the men 


(.Ihtr. Thii ipace tep- 


^ 


SwD.ngeriLlne 45 


.till living are Jepeoden, 


leKOUlhfJon'iegoliim. 


The boy i. 




on children, relative, or 




DOW chang- 


35 ^**^^ 


charity. 




ing hi. mind 










•nd con- 


The «o .e- 


^N^^ 50 1 




elude, he 


alize. that 








doe.n-|know 


l.fe U * teal- 


^^^^^ 




Age of wild O.I.. 


.. much .. 


ily and he i. 


At 45, ^^*,. 






he inugined. 




16% ate dead; ^ 


„.^^ 65 




He now con- 


°°he*Vn"e 


65% are kK .uppotting: 






sidei. his 


thought. The 


15% a.e dependent wholly 


Alto'V^ 




(•iher a 


father wa. a 


or in part; only 4% hare 


50, not one*>S^ 




n»n oi (air 


manolcicel- 


accumulated anything— 






inlelligence. 


lentjudgmen. 


and kept it. 


his lioaocial foollng.^N,^ 



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